IT’S hard to believe Anil Agarwal’s investment in Anglo American – achieved through the family investment vehicle – is anything other than the prelude to corporate action involving Vedanta, the UK-listed firm Agarwal founded.
Having announced during Indian prime minister Narendra Modi’s state visit to South Africa in 2015 that Vedanta wanted to expand its footprint in South Africa, Agarwal later made a merger approach to Anglo.
The approach was rebuffed but Agarwal was unperturbed telling the Economic Times in India, and Miningmx in an interview in February that a combination with Anglo American could be revisited.
Now he has a personal beachhead in Anglo of 13% putting him second in line after the Public Investment Corporation (PIC), the South African state-owned asset manager that has been in talks with Anglo about creating a national champion.
One suggestion is that these national ambitions would be achieved by hiving off Anglo American’s non-core South African assets, partly to a black economic empowerment entity, and then separately listing the entity.
It’s a political as well as an economic outcome in which Agarwal has seemed willing to participate. He has been highly complimentary about South Africa in a way one doesn’t often hear from other international mining industry investors.
“We are entrepreneurs and there are some risks that we have to take. But I’ve found the South African government and its people have opened their arms. I don’t get pushed from pillar to post for approval. In South Africa you go by the rules.”
Pillars and posts is all that most offshore resources investors encounter when investing in South Africa, while “going by the rules” is hardly an expression you’d apply to the Department of Mineral Resources (DMR). It recently departed from the normal bilateral talks with the Chamber of Mines to author amendments to the Mining Charter that are likely to make foreign investment in South Africa harder to undertake.
Together, however, the PIC and Agarwal have common cause, as well as nearly 28% in Anglo American, so it isn’t an almighty stretch to suppose the two could pressure Anglo CEO, Mark Cutifani, into corporate deal-making that would suit both, especially is that combined shareholding could be extended.
Analysts don’t buy the notion Agarwal is simply diversifying his personal portfolio as evidenced by the structure of share purchase in which Voltan Investments effectively rents the Anglo stock for three years in return for voting rights in Anglo.
“Anglo has confirmed plans to exit its bulks commodity business in South Africa, including Kumba iron ore, export thermal coal and potentially Samancor manganese – these may be some of the assets Agarwal is focusing on,” said Barclays Capital.
“Via Vedanta he has already acquired two sets of Anglo assets, KCM and zinc international, so he knows what potential may exist within other Anglo assets for cost cutting.
“He has a foothold presence in South Africa via the Gamsberg zinc development project (not yet producing). He also appointed Cynthia Carroll, the ex-CEO of Anglo American, as an advisor to the Vedanta board in Sept 2015 which gives him enhanced insight into the mechanics of the company,” it said.
Vedanta is investing $400m building Gamsberg which will produce 250,000 tonnes of zinc in concentrate. About 100,000 tonnes of this would be refined at Vedanta’s Skorpion zinc complex in Namibia. The company was also assessing doubling production to 400,000 tonnes of zinc metal a year, an investment that would require some $500m in investment.
Agarwal’s move has also been interpreted more broadly as a milestone in the market cycle where merger and acquisition activity has truly taken off.
Said Investec Securities: “We have been rapidly approaching the merger and acquisition stage of the current resources cycle, particularly given the current high cash generation, but this is the first clear signal that corporates are seeing value that the market is not”.
While Barclays Capital believed the chances of a broader corporate combination between Anglo and Vedanta was “remote”, the move gives Agarwal “a place at the table for any asset sales or structural changes to the group that require shareholder approval”.
The bank also notes the possibility Agarwal and the PIC have common aims is hastening the restructuring of Anglo’s South Africa assets.
“On a combined basis, the PIC and Volcan will own 27.3% of Anglo. If they were to move to 30%+ it gives them a big enough stake to affect Anglo’s broader strategy and potentially to demand board representation,” it said.
“More broadly it demonstrates risk appetite and M&A activity is starting to rumble back into life across the sector,” the bank added.